State Compensation Insurance Fund's interim president, Jim Tudor, plans to ask its board of directors to approve a short-term commission increase on its group workers' comp business to 12 percent from 10 percent, effective Oct. 1, according to sources. The move is consistent with its increases in commissions in other classes of business. What's unusual is that the increase would be in effect for only six months and would take effect at the start of the fourth quarter.

What flies just under the radar for legislators, regulators and others not inside the industry is that most of SCIF's business, following the industry norm, has an effective date of Jan. 1. Most group policies renew between Oct. 1 and March 1.

State Fund:
— is by far the largest writer of workers' comp in California, having a 38% market share
— has 272 safety groups covering a variety of industries, many in construction,  with which it communicates directly and frequently
— does not disclose board members' statements of economic interest
— pays among the highest commissions in the market
— is the only carrier to have a contingency arrangement with producers
— has more competitive groups than any other carrier

Also unknown is whether State Fund is increasing fees it pays its administrators—persons or organizations set up to "administer" the groups. One such administrator is a member of SCIF's board. In a very real sense, even if the direct percentage of fees it pays its administrators does not increase, to the extent the group business is protected or increased, its administrators' earnings increase, too.

State Fund does not make these administrative fees public. The commissioner does not require them to be included in its rate filings, although they certainly make up a considerable part of the rate, up to 3 percent, some say. Legislative sources do not have them on file, either.

Increasing commissions encourages producers either not to move or to place more business with the carrier. The industry norm is that producers tend to follow the best combination of rates and commissions, and place business accordingly.

Observers question the logic of State Fund increasing commissions at a time when the company is supposed to be decreasing its market share. But lately, they say, SCIF is growing more aggressive in its pursuit of good business that yields low loss ratios. And that type of business qualifies for SCIF's groups, which receive large premium discounts off filed rates.

Board Conflicts

The timing of the vote also raises substantial questions. Two major issues arise that portend at least the appearance of conflicts: Two SCIF board members are directly involved in safety groups.

The questions are: Should they vote on increasing commissions for group business, which they may directly benefit from? And should they vote on the appointment of a president who got those raises for them?

The timing is even more questionable in that a new president will be elected by the board soon, and Tudor has not removed himself from the running. The conflict is huge in that only three votes are required to win the position, and two could directly benefit from this proposed increase.

 "This is all about increasing members for groups during a six-month period."
—SCIF insider

With controversy starting to surround his candidacy, there is another question: Has Tudor created some sort of a Machiavellian scheme to increase support for his candidacy by garnering support from critical board members and producers who have the potential to help influence outcomes?

"This is all about increasing members for groups during a six-month period," says a SCIF insider who requested anonymity.

A State Fund spokeswoman did not return repeated phone calls asking for comment on this story.

Outside producers also confirm to the Executive that they've learned from their SCIF contacts of the plans to hike commissions on these accounts.

"I've had some correspondence on [the commission hike], but I haven't seen a release yet," says Don Tarantino, a producer with SP Tarantino Insurance Brokerage.

Adds Don Dahlmeier, a producer with North Valley Insurance: "I've heard a rumor to that effect that they're trying to push through increased commissions to us."

The board of directors is set to vote on the proposal at its next meeting. The five-member board includes, among others, Kent Dagg, head of a large SCIF Construction group, Shasta Builder's Exchange; and Frank Del Re, president of Western Insurance Administrators, which runs eight SCIF safety groups, totaling some 20,000+ employer members, according to its web site. The largest of the eight is Western Master Builders Association, which has a policy anniversary date of Oct. 1, as does the Shasta Builders' Exchange.

The board also includes Jeanne Cain, chairwoman of the board and senior vice president of the California Chamber of Commerce; Vincent Mudd, a principal in several San Diego businesses and board member of the San Diego Regional Chamber of Commerce; and James A. Santangelo, a member of the Teamsters Union since 1959.

There are also three non-voting members: Jay Hansen, legislative director of the State Building and Construction Trades Council of California; John Rea, director of the Department of Industrial Relations; and Bobby Alverado, head of the Northern California Carpenters Trust.

"The board retains control of commissions," says Don Way, a producer with Thoits Insurance. "It's not a Jim Tudor [SCIF interim president] issue. It's not a staff issue. It's a board issue."

Economic Interests Filing Not Released

For some legislators and industry pundits, the larger question is how up-front SCIF's board members are in disclosing their economic interests and potential conflicts to its policyholders, to the public and to the Governor's Office, which appoints them.

According to California law, board members' statements of economic interest are supposed to be filed with State Fund. But State Fund takes the position that it is not subject to California public records laws and therefore does not make the statements available. This defeats the whole purpose of the law, according to some.

"It's a bigger issue. There are board members who presumably have filed statements of economic interest with State Fund as required by the Political Reform Act. It's not that it's illegal. It's just a question of whether it's disclosed."
—Mark Webb, Employers Direct Insurance Company

"It's a bigger issue. There are board members who presumably have filed statements of economic interest with State Fund as required by the Political Reform Act," says Mark Webb, vice president of governmental affairs for Employers Direct Insurance Company. "It's not that it's illegal. It's just a question of whether it's disclosed."

Webb adds that these statements presumably would discuss any economic interests or conflicts the members have with commissions. He also adds that the statements are not at this time required to be filed with any other state agency, just State Fund.

"If [SCIF] were a publicly traded company, there would be far more disclosures," he says. Companies that are publicly held release much more information than State Fund, and they do so without moaning about trade secrets or hiding from auditors.

State Fund management and some producers say the carrier's statutory role in the marketplace requires that it also be competitive. They think that if State Fund is forced to shed all the good business, leaving only the bad, it could destabilize its financial position. And if private carriers start tanking again, SCIF needs to be there and to be financially sound to viably fill the void.

This makes a good argument against both increased commissions and the discussion of policyholder dividends, say experts.

Market Share Grab or Competitive Pricing

Buoyed by the much-improved California workers' comp market, State Fund appears to be holding its market share. SCIF has increased its commission structure during the past year. State Fund in August 2005 said it was increasing commissions up to 8 percent starting in January 2006 from 5 per cent. Also, around August 2005 it rolled out its controversial commission disclosure plan, which disclosed contingency commissions to employers.

SCIF increased commissions up to 10 percent starting April 1 on certain accounts, so-called "merit" business, although brokers say that carriers are increasing commissions across the board.

In conjunction with commission hikes, State Fund is growing even more aggressive with its pricing. State Fund filed for a January 2006 rate decrease of 16 percent and in July it filed for a 10 percent decrease.

Stanley Zax, president of Zenith National Insurance Company (NYSE: ZNT), says that "as long as SCIF's financial condition is solid, it should be able to follow any financial strategy it chooses, including increasing commissions."

"The people on the board of directors have nothing to do with receiving that money. [State Fund] still [has] groups that pay dividends. It's a better situation than an individual policy for an insurer because you can spread your losses over the group," Zax says.

State Fund last year wrote just less than $6 billion in premium, according to Jim Neary, State Fund vice president and chief actuary. This is compared to almost $8 billion in 2004. According to its first-quarter 2006 financial statement, State Fund is posting direct written premium of $1.023 billion, down from $1.6 billion the prior year to date.

Producers confirm that State Fund is being very aggressive in retaining certain accounts, especially profitable group business.

"State Fund recently gave a 30 percent schedule credit and a 15 percent premium discount for volume to a trucking class," Way says, adding that trucking is a group that State Fund will pursue in addition to construction.

Zenith and the Berkshire Hathaway companies also are going after this business. If State Fund commissions are competitive, brokers may be less inclined to move accounts. If a broker hits on one of its favored classes, State Fund is as aggressive as any other California workers' comp carrier, brokers say.

"I think they are more competitive now on some accounts," says Tab Randolph, a producer with Wraith, Scarlett & Randolph. But "if it's an account that can get out of State Fund, there is a good chance it'll go somewhere else."

He adds that although State Fund is getting more competitive, it's still not going to be able to compete with a 10 percent commission or even on price or service with a Berkshire Hathaway or a Zenith. Other brokers say that some large carriers are willing to be paid commission of between 12 percent and 15 percent.